If You Could Have Your Cake and Eat it too, Would You?

While this is physically impossible, the tax law makes this economically possible. The vehicle which can take you on this otherwise surreal journey is called a “charitable remainder trust”. The way it works is as follows:

  • A trust is formed to which the “Grantor” contributes property.
  • The terms of the trust provide that for a period of time the Grantor gets an annual (or more frequent) distribution from the trust, and at the end of the period, the property remaining in the Trust goes to a charitable organization.
  • The Trustee (normally) sells the property contributed by the Grantor, and invests the proceeds in revenue producing assets.

Turning back to the original metaphor:

  • The “cake” is the asset which is contributed to the trust.
  • The Grantor still “has” the “cake” because of the distributions to be received from the trust, and, because trust’s sale of the appreciated property (to facilitate the distributions to the Grantor) is not subject to income (capital gains) tax.
  • The Grantor gets to “eat” (enjoy the benefits) of the “cake” in that the Grantor gets favorable income tax treatment of the distributions received from the trust, and gets a charitable deduction for income tax purposes for the year in which the trust is funded. Often Grantors use the distributions (and/or the tax benefit) to purchase life insurance policies and thereby “replace” the transferred assets as far as their non-charitable beneficiaries are concerned.

As you can imagine there are a significant amount of variables in this structure. These include (but are not limited to): who will be the Trustee, the length of time for the distributions, whether the distributions will be a fixed amount (an “annuity”) or whether the distributions will be dependent on the value of the assets of the trust (a “unitrust”), the amounts of the distributions (either as a fixed amount or as a percentage of the assets) as well as the determination of the “charitable remainderman”.

These trusts work best if the property which will be contributed to the trust by the Grantor is something that the Grantor would otherwise sell; has appreciated in value; has a “market”; but is not presently generating the same amount of revenue for distributions as other assets. Farmland and low dividend paying (growth) stock are prime candidates for transfer to a charitable remainder trust.

Because of their complexity, you should not enter into this type of structure without the assistance of a qualified attorney and a CPA. Accordingly, there is some expense to the establishment and administration of charitable remainder trusts. Don’t try to bake your own cake-hire some professional bakers.

If you have any questions regarding charitable remainder trusts, or are in need of assistance on these, or other estate planning matters, please feel free to contact us.

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